Godfatherly Advice for Financial Crisis

The Bush family consigliere wants to make American banks an offer they can't refuse.

Writing in the Financial Times, James Baker advocates that, after subjecting them to stress tests, the government divide banks "into three groups: the healthy, the hopeless and the needy. Leave the healthy alone and quickly close the hopeless. The needy should be reorganized and recapitalized, preferably through private investment or debt-to-equity swaps but, if necessary, through public funds. It is time for triage."

Baker, who was Reagan's Secretary of the Treasury, warns against repeating Japan's mistake in the 1990s of providing guarantees and piecemeal government bail-outs that created “zombie banks,” neither alive nor dead, and led to feeble economic performance for a “lost decade.”

There has always been a Corleone streak in Baker's approach to problem-solving. Toward the end of the first Gulf War in 1991, as Bush I's Secretary of State, he warned Iraq that use of WMDs would bring nuclear retaliation and, in the Florida recount battle of 2000, he played legal hardball to get W into the White House.

If the consigliere is now advising them to get tough with the banks, the Obama Administration might do well to give Baker's approach more consideration than the second President Bush did with his advice from the Iraq Study Group before going ahead with The Surge.

Can Obama Stop the Panic?

The Lame Duck has laid an egg on the economy, and nothing better can hatch until he gets out of the nest.

Tomorrow the President-in-Waiting-Who-Can't-Afford-to-Wait will announce his financial dream team and game plan as panic buttons are being pushed all over the world.

*On Meet the Press, Bush family Consiglere James Baker, who muscled W. into office in 2000, now suggests he vacate early by sitting down with Obama now "to see if there isn't something that they could do jointly, together, over the next 58 to 60 days that would help us make sure that the financial system is stabilized and secure," warning that "this thing is even, believe it or not, going to get worse...(S)itting down together and seeing if there's not one thing that they could come together on would do a lot to restore confidence and remove the anxiety and fear that's out there."

*Senior advisor David Axelrod says Obama "wants a plan big enough to deal with the large challenges we face. And I think there's a growing consensus across the spectrum among economists that we're going to have to do something big,"

*The International Monetary Fund's Chief Economist predicts "The worst is yet to come" in the universal liquidity crisis.

*The usually sunny Thomas Friedman quotes a Yale professor of international finance questioning whether "we are staring at a deep hole that the entire world could fall into” and, if so, declaring " we need a huge catalyst of confidence and capital to turn this thing around. Only the new president and his team, synchronizing with the world’s other big economies, can provide it.

“The biggest mistake Obama could make is thinking this problem is smaller than it is."

Tomorrow at midday, the President-Elect takes the stage to do what he can to stop the panic. By late afternoon, the stock market will have given us a first reading on how well he has managed to do it.